Craigmohr Holdings Ltd. v. Baldassarre

2022 BCSC 1984 Craigmohr Holdings Ltd. v. Baldassarre

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Craigmohr Holdings Ltd. v. Baldassarre, 2022 BCSC 1984 Date: 20221007 Docket: S210792 Registry: Vancouver Between: Craigmohr Holdings Ltd. and Elements Interior Design Ltd. Plaintiffs And Tony Walter Baldassarre, Heather Lavon Thomas also known as Heather Baldassarre and Heather Baldassarre Piano Inc. Defendants Before: The Honourable Mr. Justice Giaschi Oral Reasons for Judgment In Chambers Counsel for the Plaintiffs: G.E.H. Cadman, K.C. Counsel for the Defendants: L.J. Marriner Place and Date of Hearing: Vancouver, B.C. October 7, 2022 Place and Date of Judgment: Vancouver, B.C. October 7, 2022 [1] THE COURT: We are here this morning for me to render my reasons in this application. I reserve the right to amend these reasons for grammar and clarity and to provide full citations and quotations, but the result will not change as a consequence of any such amendments. [2] The defendants apply under Rule 9‑5(1)(a) of the Supreme Court Civil Rules to strike the amended notice of civil claim filed on September 15, 2022, on the basis that it discloses no reasonable claim. The application is opposed by the plaintiffs. [3] There is no dispute relating to the test to strike a pleading under Rule 9‑5(1)(a) or as to the burden on the party seeking to have the pleading struck. A pleading should only be struck under this sub-rule where it is "plain and obvious" or "perfectly clear" it has no prospect of success: FORCOMP Forestry Consulting Ltd. v. British Columbia, 2021 BCCA 465 at para. 21 [FORCOMP], and Nevsun Resources Ltd. v. Araya, 2020 SCC 5 at para. 64. [4] Pursuant to Rule 9‑5(2), no evidence is permissible on an application under 9‑5(1)(a), but the pleading is to be read generously: FORCOMP at para.

22. The Pleading [5] The allegations of fact in the amended notice of civil claim are as follows. a) The plaintiffs are respectively the holders of 30 and 20 Class A shares of a company known as IT Tile Contracting Ltd. ("ITT") (para. 3); b) The corporate defendant Heather Baldassarre Piano Inc. ("HBP"), owned 50 Class A shares in ITT: (para. 7). It is not pleaded whether there were any other shareholders or issued shares in ITT; c) The individual defendant Tony Baldassarre ("Tony") is alleged to be a key employee of ITT (para. 4). No other particulars are pleaded as to his duties or responsibilities; d) The individual defendant Heather Thomas ("Heather") was at all material times the spouse of Tony and the sole director and operating mind of HBP. In addition, it is pleaded that she is a director and the secretary of ITT (paras. 5-6); e) At the material times up to January 22, 2021, the directors of ITT were Heather, Andrea Shumka, and Marnie Shumka; f) At the material times up to January 22, 2021 the officers of ITT were Dale Shumka, president and, as I have already noted, Heather as secretary; g) On December 14, 2020, the directors of ITT passed two resolutions as set out at para. 9 of the notice of civil claim. i. The first changed the signing officers on all Vancity Savings Credit Union accounts and supplier accounts to include "one representative of each shareholder,

[with] any two to sign (no exceptions)." ii. The second resolution imposed a requirement that any expenditure over $500 be approved by the president or, in his place, the vice‑president and the secretary. It is not clear from the pleading if there was a vice‑president. h) Prior to December 31, 2020, "without the knowledge, consent or approval of the President and two of the three Directors", Heather or Tony, or the two of them acting together, opened an account in the name of ITT with Scotiabank. (para. 10); i) The Scotiabank account, was deliberately concealed from the plaintiffs and the other directors and neither the board nor the president authorized it: (paras. 10,13); j) On January 11, 2021, Tony came into possession of a cheque for $160,333.87 payable to ITT which he deposited into the Scotiabank account (paras. 11-13); and k) Between December 31, 2020, and January 25, 2021, Tony and/or Heather caused payments of $159,517 to be made from the Scotiabank account, including a payment of $100,000 to HBP and/or Heather. These payments were made "without the knowledge, consent or approval of, and deliberately concealed from, the President and the other Directors of ITT" (para. 14). [6] The amended notice of civil claim further pleads that: a) Tony, as a key employee of ITT, owed a fiduciary duty to act in the best interests of ITT and its shareholders, including the plaintiffs

(para. 12); b) As a director and officer of ITT, Heather owed a fiduciary duty to the plaintiffs as shareholders of ITT (para. 12); c) The depositing of the cheque into the Scotiabank account and the payment out of funds from that account were done in breach of the fiduciary duties owed by Tony and Heather and constituted a fraud against the plaintiffs. (paras. 13, 15, and 17); and d) Finally, by reason of the facts alleged, the plaintiffs have suffered damages in an amount of at least 50 percent of the converted cheque, being $80,166.94. (para. 18) [7] The amended notice of civil claim further pleads that the plaintiffs have reason to believe Tony, with or without the knowledge of Heather, may have committed other frauds. (para.

19) No further particulars of these other possible frauds are pleaded. [8] The relief sought in the amended notice of civil claim includes damages for fraud, breach of fiduciary duties, and conversion. Punitive damages and an accounting are also claimed. [9] The legal basis section of the amended notice of civil claim pleads breaches of s. 142(1) of the Business Corporations Act, S.B.C. 2002, c. 57 [BCA], breach of fiduciary duty, fraud, and conversion. [10] I note that s. 142(1) of the BCA imposes a duty on directors to act honestly and in good faith, to exercise care and diligence and to act in accordance with the BCA and the articles of the company. Submissions [11] The defendants submit the wrongs alleged in the amended notice of civil claim are wrongs done to the company ITT. They say that pursuant to the rule in Foss v. Harbottle, [1843] J.C.J. No. 1 [Foss v. Harbottle], the plaintiffs have no cause of action against the defendants for wrongs allegedly done to the corporation. In particular, the defendants submit that the plaintiffs have no independent cause of action and suffered no independent loss. They further say that no fiduciary duties are owed to the plaintiffs in the circumstances and that the causes of action based on fraud and conversion are not available to the plaintiffs as shareholders. [12] The plaintiffs deny the rule in Foss. v. Harbottle is applicable.

They submit that fiduciary duties are owed to them by the defendants and that actions in fraud and conversion are available to them in the circumstances. Analysis Foss v. Harbottle [13] The rule from Foss v. Harbottle is concisely set out by Justice Hunter in EY Holdings Ltd. v. Great Pacific Mortgage & Investments Ltd., 2017 BCCA 405 at para. 27 [EY Holdings] [27] A convenient statement of the rule in Foss v. Harbottle and the underlying rationale for the rule can be found in the Supreme Court of Canada judgment in Hercules Management Ltd. v. Ernst & Young, 1997 CanLII 345 (SCC), [1997] 2 S.C.R. 165 at para. 59: The rule in Foss v. Harbottle provides that individual shareholders have no cause of action in law for any wrongs done to the corporation and that if an action is to be brought in respect of such losses, it must be brought either by the corporation itself (through management) or by way of a derivative action. The legal rationale behind the rule was eloquently set out by the English Court of Appeal in Prudential Assurance Co. v. Newman Industries Ltd. (No. 2), [1982] 1 All E.R. 354, at p. 367, as follows: The rule [in Foss v. Harbottle] is the consequence of the fact that a corporation is a separate legal entity. Other consequences are limited liability and limited rights. The company is liable for its contracts and torts; the shareholder has no such liability. The

company acquires causes of action for breaches of contract and for torts which damage the company. No cause of action vests in the shareholder. When the shareholder acquires a share he accepts the fact that the value of his investment follows the fortunes of the company and that he can only exercise his influence over the fortunes of the company by the exercise of his voting rights in general meeting. [14] In Roussy v. Savage, 2019 BCSC 1669, at paras. 268-271 [Roussy], Justice Watchuk summarized the rule as follows: [268] It is well-established law that a shareholder may not sue for a wrong done to a company: Robak Industries Ltd. v. Gardner, 2007 BCCA 61 at para. 4 [Robak]. This is known as the rule in Foss v. Harbottle. This rule operates as an important corollary of the principle that a corporation constitutes a separate legal entity from its shareholders. Just as a shareholder cannot be sued for the wrongs of the corporation, neither can they sue for the wrongs done to it. [269] According to this rule, a shareholder may only make a claim in their personal capacity where they demonstrate that they have both an "independent relationship" with the wrongdoer in question and have suffered an "independent loss" separate from any loss suffered by the company: Robak at para. 38. [270] There are many rationales for this rule. The rule prevents double recovery by the company and its

shareholders for wrongs done to the company alone. In addition, the rule "bars recovery by one or some shareholders of losses caused by wrongs done to the company, at the expense of creditors and other shareholders of the company": Robak at para. 37. [271] This rule continues to apply even after the bankruptcy of a corporation: see Hill v. Bridgemohan, 2008 NSSC 219 at para. 85 and the cases cited therein. To allow one shareholder to claim for a wrong done to a bankrupt corporation would effectively grant that shareholder priority over all its other creditors. [15] The defendants submit that the rule in Foss v. Harbottle is applicable. I agree. [16] The essence of the pleaded allegations is that the defendants redirected funds of the company ITT to themselves. The cheque that was deposited into the Scotiabank account was payable to ITT. The cheque and the funds it represented were company property. If the defendants misdirected the cheque or misappropriated or used the funds for improper purposes, as alleged, that is a wrong done to the company. Any loss to the plaintiffs as a consequence of the defendants' alleged wrongful actions is a loss derivative of the company's losses. (EY Holdings at para. 47). The rule in Foss v. Harbottle is firmly engaged. [17] The plaintiffs have not pleaded either an independent relationship giving rise to an independent cause of action or an

independent loss. This is apparent from the causes of action pleaded, which I will now address. Breach of Fiduciary Duty [18] The plaintiffs submit that both Tony and Heather owed them fiduciary duties. In respect of Tony, they allege that as a "key employee", he owed a fiduciary duty to ITT and its shareholders, including the plaintiffs. In respect of Heather, it is alleged that as a director and officer of ITT, she owed a fiduciary duty to the plaintiffs as shareholders of ITT. [19] It is well accepted as a matter of law that directors owe fiduciary duties to their company. It has also been established that a "key employee" may owe fiduciary duties to the company: Sateri (Shanghai) Management Limited v. Vinall, 2017 BCSC 491 at para.

359. However, it does not follow that either Heather or Tony owed fiduciary duties to the plaintiffs as shareholders of the company. [20] Fiduciary duties owed by directors to a company are not transferrable to a shareholder. To maintain an action for breach of fiduciary duty, a shareholder must establish an independent duty and an independent loss. These principles are well known and again were noted by Watchuk J. in Roussy at para. 272. [272] Where an individual shareholder makes a claim for a breach of fiduciary duty owed to them from a corporate director, that individual must show two things: that the director owed them a fiduciary duty independent of the duty owed by the director to the corporation; and that the breach of that duty caused a loss independent of any loss suffered by the corporation as a whole. [21] Further, in Roussy, at paras. 296-297, Watchuk J. noted that there are exceptional circumstances where the director‑shareholder relationship can give rise to a fiduciary duty. [296] The relationship between shareholders and directors rarely gives rise to a fiduciary duty independent of the fiduciary duty already owed by the director to the corporation. It is settled law that directors of corporations do not owe fiduciary obligations to any stakeholders, including shareholders, solely by virtue of their respective positions: BCE Inc. Re, 2008 SCC 69 at para.

66. [297] While the director/shareholder relationship does not constitute a fiduciary relationship in itself, however, such a relationship may arise in certain circumstances. In particular, directors have been found to owe a fiduciary duty towards other shareholders in circumstances where there is either a family relationship or a special relationship of trust and dependency between the parties where the director seeks to take unfair advantage of others for personal gain or profit: Valastiak v. Valastiak, 2010 BCCA 71 at paras. 48-49; Dusik v. Newton, 1985 CanLII 406 (BCCA) at para. 40. [Emphasis added] [22] The plaintiffs submit that the facts of this matter fall within the exception referred to by Watchuk J. I do not agree. [23] The exception is circumstances "where there is either a family relationship or a special relationship of trust and dependency between the parties where the director seeks to take unfair advantage of others for personal gain or profit". The plaintiffs have not pleaded any family relationship, nor is there anything in the pleading that remotely suggests any type of "special relationship of trust and dependency". To the contrary, the pleading alleges the fiduciary duties are owed on the basis of the positions of Tony and Heather as key employee or director of the company. In the circumstances, the plaintiffs have not pleaded an independent duty or facts

giving rise to an independent fiduciary duty. [24] Additionally, the plaintiffs have not pleaded an independent loss. The loss alleged is one‑half of the allegedly misappropriated or misdirected company funds. That is a loss that is derivative of the company's loss, not an independent loss. [25] Accordingly, the pleading does not disclose a cause of action for breach of fiduciary duty to the plaintiffs. Conversion [26] The plaintiffs plead a cause of action in conversion. The tort of conversion was addressed in Lepage v. Bowen Island Municipality, 2021 BCSC 1077 at para. 4, citing Chief Justice Hinkson in McKnight v. Hutchinson, 2019 BCSC 944. Conversion involves wrongful interference with the goods and chattels of another. The elements of the tort are: (1) a wrongful act by the defendant involving the goods of the plaintiff; (2) the act must consist of handling, disposing, or destroying the goods; and (3) the defendant's actions must have either the effect or intention of interfering with or denying the plaintiff's right or title to the goods. [4] The law with respect to the tort of conversion was recently summarized by Chief Justice Hinkson in McKnight v. Hutchinson, 2019 BCSC 944: [166] The tort of conversion involves the wrongful interference with the goods of another: Teva Canada Ltd. v. TD Canada Trust, 2017 SCC 51 at para.

3. In Ask v. Mikolas, 2010 BCSC 127, Mr. Justice Cullen (as he then was), described the tort of conversion as follows, at paras. 125-126: [125] The tort of conversion involves the wrongful interference with another person's chattels such as taking, using or destroying the goods in a way that is inconsistent with the owner's ownership of or title to the goods. See: Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, 1996 CanLII 149 (SCC), [1996] 3 S.C.R. 727 at para. 31. [126] The elements that must be proven to establish the tort of conversion are: (a) a wrongful act by the defendant involving the goods of the plaintiff; (b) the act must consist of handling, disposing, or destroying the goods; and (c) the defendant's actions must have either the effect or intention of interfering with (or denying) the plaintiff's right or title to the goods. [167] The defendant's wrongful act must be a deliberate act of interference or dealing with the property that is inconsistent with, or repudiates, the plaintiff's right to it: Insurance Corp. of British Columbia v. Suska, 2011 BCCA 51. The defendant's conduct must be intentional. Negligent dealing with goods does not constitute conversion: Lewis N. Klar, Remedies in Tort (Toronto: Thomson Reuters, 2019). [27] The property that is alleged to have been converted here is the cheque payable to ITT and the funds it represented. The

cheque was not the property of the plaintiffs and is not pleaded to be their property. It was the property of ITT. ITT may have a cause of action in conversion, but the plaintiffs do not as the cheque was not their property. [28] Accordingly, the plaintiffs have no cause of action in conversion. Fraud [29] The final cause of action pleaded by the plaintiffs is fraud. The elements of fraud are set out in Boyd v. Cook, 2016 BCCA 424 at paras. 24-25, quoting from Dhillon v. Dhillon, 2006 BCCA 524 and Bruno Appliance and Furniture Inc. v. Hryniak, 2014 SCC 8, a decision of the Supreme Court of Canada. The elements of civil fraud are: (1) a false representation by the defendant to the plaintiff; (2) knowledge on the part of the defendant that the representation was false; (3) reliance on the false representation by the plaintiff; and (4) damages suffered by the plaintiff as a consequence. [24] The elements of the tort of deceit or fraudulent misrepresentation are well established. They were described as follows by the majority of the Court in Dhillon v. Dhillon, 2006 BCCA 524: [77] While fraudulent activities in the civil context (i.e. "civil fraud") can occur in innumerable ways, the "civil fraud" cause of action is recognized in Canada as the tort of deceit, also referred to as the tort of fraud or fraudulent misrepresentation. In The Law of Torts in Canada, second edition, 2002,

Fridman sets out the elements required to make out a complete cause of action in the tort of deceit at pages 747-755. The plaintiff must prove (1) that the defendant made a false statement, knowing it to be false, and intending it to deceive the plaintiff, (2) that the plaintiff relied on the fraudulent misrepresentations of the defendant, and (3) that the plaintiff's damage was caused by that reliance. [25] In Bruno Appliance and Furniture Inc. v. Hryniak, 2014 SCC 8, Karakatsanis J., speaking for a unanimous Court, summarized the elements of the tort succinctly: [21] . I summarize the following four elements of the tort of civil fraud: (1) a false representation made by the defendant; (2) some level of knowledge of the falsehood of the representation on the part of the defendant (whether through knowledge or recklessness); (3) the false representation caused the plaintiff to act; and (4) the plaintiff's actions resulted in a loss. [30] The amended notice of civil claim does not plead any facts upon which a finding of fraud could be made. No representation is alleged to have been made by the defendants. Moreover, even if it is accepted that silence is, in the circumstances, a misrepresentation, there is no allegation that the plaintiffs relied on the misrepresentation. Additionally, as with the other causes of action, the damages are to the company and not the plaintiffs. [31]

Therefore, it is plain and obvious that the plaintiffs have no prospect of success. Pursuant to the rule in Foss v. Harbottle, the application is allowed and the amended notice of civil claim is struck. [32] Costs? [33] CNSL L. MARRINER: We are just seeking, Justice, costs at the ordinary scale, so Scale B. [34] THE COURT: And that is costs of the entire action? [35] CNSL L. MARRINER: Yes. [36] CNSL G. CADMAN: Costs follow the event ‑- [37] THE COURT: Yes. [38] CNSL G. CADMAN: ‑‑ Justice. [39] THE COURT: All right. Costs to the defendants at Scale B. "Giaschi J."